Tax abuse of law: the "mini-abuse" in practice

Quick answer. Abuse of law lets the French tax authorities disregard a sham act or one driven by an exclusively tax purpose (Tax Procedure Code, art. L. 64), with an 80% surcharge. Since 1 January 2021, the "mini-abuse" rule (art. L. 64 A) targets arrangements with a mainly tax purpose, without the automatic 80% surcharge.

Abuse of law is one of the most misunderstood concepts among business owners. Many confuse a clever, perfectly legal management decision with wrongful behaviour. In our wealth-structuring and holding-company files, the question comes up constantly: "Could this arrangement be reclassified?"

The stakes are not theoretical. A reclassification involves not only the additional tax but also heavy surcharges and interest. Understanding where the line sits between a legitimate tax choice and an artificial arrangement is therefore a genuine management skill.

For more on the logic of legal arbitrage, see our article on tax optimisation as a legal strategy to reduce the tax burden.

In its historical form, abuse of law is defined by article L. 64 of the French Tax Procedure Code (Livre des procédures fiscales). The authorities may disregard, as unenforceable against them, acts falling into one of two situations.

The first is sham: the act reflects no reality and exists only on paper. The second is fraud on the law: the act seeks the benefit of a literal application of the legislation, against the objectives pursued by its authors, and could have been driven by no motive other than to evade or reduce tax.

This last criterion shapes the whole analysis: the purpose must be exclusively tax-driven. If another genuine motive exists, however modest (economic, patrimonial, organisational), classic abuse of law cannot in principle be established.

The penalty is severe. Article 1729 b of the French General Tax Code (CGI) provides for an 80% surcharge, reduced to 40% where the taxpayer is neither the main instigator nor the main beneficiary of the arrangement. This surcharge is added to late-payment interest. We set out the full scale in our guide on tax penalties and surcharges of 10%, 40% and 80%.

The "mini-abuse of law" is defined by article L. 64 A of the Tax Procedure Code. It has applied since 1 January 2021, to acts carried out from 1 January 2020.

Its purpose is to widen the scope of the procedure. Where classic abuse of law requires an exclusively tax-driven purpose, the mini-abuse targets arrangements with a mainly tax purpose. In other words, an act driven essentially by tax, even if it carries a secondary non-tax motive, may now fall under this procedure.

One point is often missed: the automatic 80% surcharge specific to classic abuse of law does not apply to the mini-abuse. Instead, the ordinary-law surcharges of article 1729 of the CGI may apply depending on the case, namely 40% for a deliberate breach and 80% for fraudulent practices. The penalty regime is therefore not mechanical: it depends on the classification adopted.

This is the heart of the matter, and the main source of concern for business owners. The distinction turns on the weight of the tax motive in the decision.

Under the classic regime, the pursuit of a tax advantage must be the sole driver of the act. A genuine non-tax motive, even a secondary one, is in principle enough to rule out the abuse classification.

Under the mini-abuse, the tax motive must be predominant. A secondary, marginal or purely cosmetic non-tax motive is no longer enough to shelter the arrangement. The question then becomes: would the taxpayer have carried out this operation in the absence of the tax advantage? If the answer is clearly no, a mini-abuse risk exists.

This is precisely why the economic substance of a transaction has become decisive. The line is drawn less on the declared intention than on what the arrangement actually produces.

In our corporate tax advisory work, we follow a structured approach to document the non-artificial nature of a transaction. Here are the essential steps.

1. Identify the genuine non-tax motive(s): growth, transmission, asset protection, operational reorganisation, bringing in investors. The motive must exist, not merely be claimed.
2. Document those motives in writing, upstream: board minutes, business plan, correspondence, opportunity notes. A motive reconstructed after the event carries little weight.
3. Give the arrangement real substance: human and material resources, effective activity, consistent financial flows, autonomous decision-making.
4. Check overall consistency: successive acts must tell a credible economic story, not merely a tax one.
5. Keep an audit trail: date the documents, archive the resolutions, link each decision to its business context.

This logic of proof matters all the more because the burden of proof lies with the authorities. They must show the sham character, or the mainly (or exclusively) tax purpose. A well-documented file makes that demonstration considerably harder.

Some patterns attract more scrutiny. Without presuming any irregularity, they call for particular vigilance and enhanced documentation.

• A transaction whose only tangible effect is a tax saving, with no real operational change.
• Cascading arrangements clustered in time, whose sequence has no logic other than tax.
• An interposed structure with no resources, no activity and no substance (a shell).
• Circular financial flows that return to their starting point.
• An artificial legal classification of income to qualify for a more favourable regime.
• The absence of any motive other than the tax advantage when the origin of the transaction is questioned.

These signs overlap with those we examine for abnormal management acts and at-risk operations, a concept that is close to but distinct from abuse of law.

No, and this point must be settled. Choosing, among several lawful routes, the one that is least taxed is a taxpayer's right. Opting for the actual-profit regime rather than the micro regime, arbitrating between salary and dividends, using a holding company to steer a group: these are legitimate management choices.

Abuse of law does not start there. It starts with the artificial arrangement, devoid of substance, contrary to the legislator's intention and driven by a mainly or exclusively tax purpose. The line is not the tax saving itself, but the artifice.

This distinction is developed in our dedicated article on holding companies and group taxation.

The patrimonial holding company. This is the most frequent situation in our files. A holding can perfectly well serve a legal optimisation objective (centralising cash, reinvestment, transmission). The risk arises when it is devoid of substance and serves no purpose other than to erase a tax. We support these structurings as part of our holding taxation work.

Sale-and-reinvestment operations. A contribution followed by a sale, poorly sequenced or undocumented, may be questioned from the angle of the mainly tax purpose. Substance and chronology are decisive.

Liberal professions and property-holding companies (SCI). Interposing a company with a purely formal activity, created on the eve of an operation, calls for heightened vigilance.

The mini-abuse of law caused concern, sometimes excessively, when it came into force. The fear of a systematic challenge to all optimisation proved disproportionate. Doctrine and practice have confirmed that economic substance remains the central criterion: a real, documented and consistent transaction has no reason to tip into abuse, even if it produces a tax advantage.

Our conviction is simple. Abuse of law is not prevented on the day of the audit, but on the day the operation is designed. The right reflex is not to hide the tax benefit, but to make the non-tax motive visible.

The most frequently overlooked risk is not the reassessment itself, but the lack of written evidence of the economic motives. Many owners have genuine reasons to structure their assets or their business, yet never formalise them. The day the authorities question the operation, the non-tax motive exists in fact but appears nowhere.

Reconstructing a justification after the event is always fragile. This is why we insist on documenting upstream, when the decision is made, not several years later. Where a reassessment notice gives a 30-day reply window, there is little time to gather evidence that should have existed from the outset.

When the authorities consider abuse of law, they follow a regulated procedure. The burden of proof lies with them. Both the taxpayer and the authorities may refer the matter to the Tax Abuse of Law Committee (Comité de l'abus de droit fiscal, CADF) for an opinion. This body issues an advisory opinion on whether the arrangement is abusive.

This is one of the moments where professional support truly matters. The quality of the file, the consistency of the explanations and the strength of the supporting documents bear directly on the outcome. For a broader overview of the stages, see our article on the tax audit of businesses.

A business owner recently consulted us about a scheme holding his shares through a holding company, set up a few years earlier without professional support. He was worried the operation might be questioned from the angle of a mainly tax purpose.

Reviewing the file, we found that genuine economic motives did exist: preparing the transmission to his children, pooling cash to fund external growth, and a planned entry of a minority partner. Those motives were simply undocumented. We reconstructed and formalised the holding's substance (effective financing activity, autonomous governance, consistent flows) and linked each decision to its business context. The operation rested on an economic reality: the task was to make it demonstrable.

This work is as much a matter of taxation as of the company's annual legal support.

Before any structuring operation, ask yourself a simple question: "Would I have done this operation without the tax advantage?" If the answer is yes, document the non-tax motive now. If it is no, let's talk before acting. As a chartered accountant and statutory auditor, our role is to secure the economic consistency of your decisions, not to build artificial arrangements. This vigilance is central to the role of the chartered accountant alongside business owners.